Fall in employment and property values is inevitable

commercial propertyIt is already inevitable that the economic fallout from the COVID-19 pandemic will include a “big hit to commercial property values” and a rise in unemployment in the UK, according to reports from researchers Capital Economics (paywall). The economic research consultancy has downgraded its forecasts for the UK economy and, as a result, is projecting a near 10 percent decline in property values and a rapid but short-lived increase in unemployment.

According to its report, “the shock should be short and sharp”, but the level of uncertainty makes long term projections more difficult. With greater travel, work and venue restrictions in place and the ramping up of social-distancing advice, UK GDP is forecast to fall as much as 15 percent quarter on quarter between April and June.

There will be a short, sharp spike in unemployment: an estimated rise from 3.9 per cent to six per cent; roughly 700,000 job losses. In just four weeks, 200,000 people in Britain’s leisure and hospitality sectors have lost their jobs.

“This is a temporary, if very severe, disruption however, and the economy is expected to recover much of this ground by the end of 2021,” Capital Economics said. “Property is better in theory placed to weather the disruption than other financial assets, as rents are generally contracted for several years, so much income is secure.

“But the deeper and more prolonged the crisis, the more downward influence new leases, breaks or re-negotiations will exert. And of course, there is a growing risk of existing tenants defaulting. So it is unlikely that rents will be unscathed.”

Capital Economics’ report now predicts a 10 percent fall in rents during the second quarter of the year, “given the severity of the slump, though we assume a reversal as the crisis dissipates”. As a result, total returns in 2020 are expected to be around minus 4.8 percent, although a rebound in 2021 is expected to deliver a total return of 9.8 percent

However, Capital Economics admitted that “current uncertainty is huge” and so “a more extreme downside with a weaker recovery cannot be ruled out”.

The report said: “This would push us closer to previous crashes, with values down by more than 25 percent this year as a result. But the global financial crisis market contraction lasted more than two years and this shock should be briefer. And with no debt-fuelled investment boom and supply tight in many markets, some risk factors are absent. In addition, further mitigation may come from more aggressive policy measures if the crisis is prolonged.”

Image by PublicDomainPictures